Sometimes I think our collective memory is suffering Alzheimer’s Disease.
Can it be that we have already forgotten the multiplier effect of subprime mortgage CDS? Can it be that we don’t know that AIG’s derivative book could have been the lynchpin of a cascading avalanche of defaults that would have sent us back to the 18th century financially?
A friend sent this along this morning. Color me stunned.
The point of insurance, of course, is to be paid when disaster strikes. The theory of insurance is that disaster tends to be local (or personal), so the pool of all those being insured pays a small amount for each, and the one who has the loss collects.
More on this later when I look into health insurance.
But, back to this insane new “index” that pays off when financial crisis hits. The point being, if it’s a financial crisis, it will hit everyone, so who will have enough money to pay claims to those who bought the insurance?
I know, the taxpayer. Only future taxation will be left standing (if you could call it that) once all the financial companies have a web of interwoven insurance policies they wrote for each other.
By tying everything together even tighter, and by making yet another way to hid the risk pea under the off-balance sheet walnut shells, the quants at Citi are selling the idea that they will be around to pay off enormous amounts of money when the market is basically frozen solid.
If you believe them, I’m going into the business of writing massive asteroid insurance. Just pay me $1,000 per year starting today, and if an asteroid more than 10 miles in diameter hits the Earth, I will pay you a million dollars.